Restructuring Spurs Debate

The question of how fast and what means and methods credit unions, particularly those which have relied on the corporates for a broad mix of services, should be pursuing in light of corporate restructuring generated a new round of industry debate last week.

For one, the new head of the California and Nevada Credit Union Leagues, Diana Dykstra, joined one industry chorus in cautioning CUs against making hasty decisions on corporate services, stressing initial system recommendations may be at hand in a matter of weeks.

Dykstra said preliminary fact-finding in pursuit of what she called a system solution has already been completed by a 12-member league task force, which included visits or interviews with five existing corporates.

She declined to identify any of the corporates but said proposals for how California and Nevada CUs and others would meet the fallout from the corporate situation would be made clear by the end of November.

The final directions CUs may take, she said, could become more evident following CUNA's Corporate Summit gathering of vendors, corporate CEOs, and top brass from CUNA, the leagues and NAFCU on Nov. 13 in Chicago.

Taking a slightly different slant on the corporate dilemma was NAFCU's leadership, which argues that CUs need to become proactive now in meeting with corporate leaders, whether the bridge variety or the healthier, well-capitalized entities.

"I commend these natural person credit unions for their hands-on approach and the corporate CEOs who have uniformly expressed support for calls to action by their natural person member-owners," said Fred Becker, NAFCU president/CEO.

"In this regard," he said, "one thing is certain, the ultimate determination of the services to be provided by corporate credit unions, as well as the size, scope and extent of the corporate system, must rest with their member-owner natural person credit unions. They, and they alone, must be permitted to set the course and direction of their corporate for the future."

Becker maintained new capital requirements impacting existing corporates as well as a rule that may arise at a November meeting of the NCUA board limiting membership to one corporate raises issues that must be considered by individual CUs on service options.

CUs, said Becker, may need to consider "diversification, to include exploring alternative service providers as a fall-back in the unfortunate event there is a disruption in an institution's products and services."

On that score, NAFCU has provided member CUs with information on the Federal Reserve's discount window and encouraged exploration of options with the Federal Home Loan Bank System.

Moreover, in seeking out alternatives and conducting due diligence, CUs may actually want to start issuing "RFPs as they would in the case of any other product or service," suggested Becker.

For her part, Dykstra along with members of the league's own corporate task force, now expanded to eight states, have stressed the need for an enduring system solution, avoiding, quick-fix, piecemeal moves.

Still, the need for an overall solution comes as "commercial and outside organizations press ahead with pushing item processing and payment services," noted the league.

"Credit union leaders have not forgotten, and hope not to repeat, the disruption that occurred for dozens of credit unions when Bank of America acquired Security Pacific Bank and Security Pacific's profitable credit union service division was dissolved because service to credit unions is not consistent with BofA's business philosophy," said the league.

In that event, which occurred two decades ago, "there was a mad dash where credit unions had 60 days to find a replacement and let me tell you none of us want that again," said Dykstra, the former president/CEO of San Francisco Fire CU.

And while outside firms "may be able to provide item processing, a financial institution connection is needed to provide collaborative settlement and related liquidity services" said the league in its latest discussion of its task force.

"It has been said that, in this instance, too many solutions may be as bad as no solution at all, since it could lead to irreversible system fragmentation," warned the league.

"To successfully replicate the essential services natural person credit unions have been accustomed to receiving from their corporate credit unions (minus the investment and inter-lending functions) in a cost-effective manner, it will require considerable aggregation of volume," said the league.

That's because the cost of such services will no longer be subsidized by investment activity and "given likely narrow margins, it is unlikely that a multitude of solutions will see much success; competitive pressure could result in predatory activity and, eventually, more painful consolidation,"

Outside of California and Nevada, a number of leagues continued to press ahead last week with meetings and webinars to help guide their members on current conditions and possible courses to follow.

The Washington Credit Union League started a series of online "Corporate Corner" papers also discussing service options "and various aspects of the corporate credit union crisis and the NCUA's plans to resolve the issue and stabilize the industry."

The New Jersey Credit Union League was scheduling corporate discussions at its chapter meetings held this month.